The opinion of the court was delivered by: Daniel L. Hovland, Chief Judge United States District Court
ORDER GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
Before the Court are the Plaintiffs' motion for summary judgment filed on December 1, 2008, and the Defendant's motion for summary judgment filed on January 9, 2009. See Docket Nos. 15 and 21. On January 9, 2009, the Defendant filed a consolidated brief in response to the Plaintiffs' motion and in favor of his motion. See Docket Nos. 22 and 23. On February 10, 2009, the Plaintiffs filed a consolidated response in opposition to the Defendant's motion and in favor of their motion. See Docket Nos. 26 and 27. Oral argument was held in Bismarck, North Dakota on October 1, 2009. For the reasons set forth below, the Plaintiffs' motion for summary judgment is granted and the Defendant's motion for summary judgment is denied.
The facts are not in dispute. Plaintiffs Medcenter One Health Systems and St. Alexius Medical Center are hospitals located in Bismarck, North Dakota. The hospitals participate in a three-year family practice residency program operated in conjunction with the University of North Dakota School of Medicine. For accreditation purposes, a family practice residency is required to train residents in rotations outside of a hospital in non-hospital settings. To meet this requirement, Medcenter One and St. Alexius established the Family Practice Center which is located in Bismarck, North Dakota. Both hospitals train their residents at the Family Practice Center. The Family Practice Center is vital to recruiting and retaining family practice physicians to serve Bismarck and the surrounding communities.
The residency training program at the Family Practice Center was created in 1976 as a partnership between the two hospitals and the University of North Dakota School of Medicine. The operational and financial roles of the University and the hospitals with regard to the residency training program have remained the same up until and through 2004. Prior to 2005, the University was responsible for the day-to-day operational functions of resident training and the up-front aggregate costs, including faculty and staff salaries, residents' stipends and benefits, faculty supervision costs, community faculty supervision costs, and other operating expenses. The University then billed the hospitals for the costs that were not paid by other university sources, such as patient revenue. The hospitals made quarterly and year-end payments to the University, with each hospital paying the University fifty percent of the quarterly and year-end payments. The hospitals then submitted cost reports to the Department of Health and Human Services for reimbursement of the costs incurred in training their own residents at the Family Practice Center. Prior to 1999, the hospitals were reimbursed for the direct and indirect costs that they incurred in training their own residents at the Family Practice Center.
During the years 1999, 2000, and 2001, Medcenter One and St. Alexius each claimed a share of the full-time equivalent residents that rotated through the Family Practice Center. The University billed each of the hospitals in the manner described above for the costs that were not paid by other university sources. Because the hospitals split the full-time equivalent residents that trained at the Family Practice Center and paid for the costs incurred in training their own residents, the hospitals ensured that Medicare was not overcharged and paid only once for the costs of training the full-time equivalent residents that rotated through the Family Practice Center. Nonetheless, fiscal intermediaries, acting on behalf of the Secretary for the Department of Health and Human Services, denied the hospitals Medicare reimbursement in 1999-2001, for the direct and indirect costs incurred in training their residents at the Family Practice Center. The hospitals' cost reports were adjusted in the amount of $283,115 for Medcenter One and $105,309 for St. Alexius for a total adjustment of $388,424.*fn1 The hospitals appealed the cost adjustments to the Department of Health and Human Services Provider Reimbursement Review Board.
On July 11, 2007, the five-member Review Board conducted a hearing of the hospitals' appeal. On February 26, 2008, the Board issued a decision in favor of the hospitals. See Docket No. 12, p. 30. The Administrator of the Centers for Medicare and Medicaid Services, acting under authority delegated by the Secretary, exercised his discretion and reviewed the Board's decision. On April 25, 2008, the Administrator issued a decision in which he affirmed the fiscal intermediaries' decision and reversed the Board's decision, finding that the hospitals failed to meet the statutory and regulatory requirements for reimbursement of direct and indirect costs for residency training. See Docket No. 12, p. 2. On June 27, 2008, the hospitals filed a complaint in federal district court for judicial review of the agency decision.
The parties have each filed summary judgment motions. There are no factual issues in dispute. The Plaintiffs contend that the Administrator erred in reversing the Provider Reimbursement Review Board and affirming the fiscal intermediaries' disallowance of residents' rotations at the Family Practice Center for years 1999, 2000, and 2001. The Plaintiffs contend that the Administrator retroactively applied the Secretary's 2003 interpretation of the Medicare Act to disallow the residents' rotations and, therefore, the final decision of the Secretary was arbitrary and capricious. The Secretary contends that the Plaintiffs did not meet the requirements under the Medicare Act because they did not have a written agreement to indicate which facility, namely, Medcenter One, St. Alexius, or the Family Practice Center, would bear all or substantially all of the costs of the residency training program. In addition, the Secretary contends that even if the Court finds that the Plaintiffs satisfied the written agreement requirement under the Medicare Act, the Administrator's application of the 2003 interpretation of the Medicare Act was not a retroactive application of the law, but rather was a clarification of the policies that were in effect for the years in dispute.
The Court has jurisdiction to hear the action pursuant to 42 U.S.C. § 1395oo(f), which incorporates the review standards of the Administrative Procedure Act (APA), 5 U.S.C. § 701 et seq. 5 U.S.C. § 706 governs the scope of judicial review and provides, in part:
To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. The reviewing court shall --
(2) hold unlawful and set aside agency action, findings, and conclusions found to be --
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
(B) contrary to constitutional right, power, privilege, or immunity;
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
(D) without observance of procedure required by law;
(E) unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or
(F) unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.
5 U.S.C. §706(2). "Because this is a deferential standard, 'the orderly functioning of the process of review requires that the grounds upon which the administrative agency acted be clearly disclosed and adequately sustained.'" Gatewood v. Outlaw, 560 F.3d 843, 846 (8th Cir. 2009) (quoting SEC v. Chenery Corp., 318 U.S. 80, 94 (1943)).
Judicial review of an agency's construction of a statute which it administers is generally governed by Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). The court must review the agency's construction of the statute and determine whether the intent of Congress is clear and, if so, give effect to the unambiguously expressed intent of Congress. If the intent of Congress is not clear, the court must determine whether the agency's interpretation is based on a permissible construction of the statute. The United States Supreme Court has said, "We have long recognized that considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer, and the principle of deference to administrative interpretations." Id. at 844.
The court must defer to the agency's interpretation of its own regulations. Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). Broad deference is especially accorded when, as here, the regulation concerns "a complex and highly technical regulatory program." Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697 (1991). "A reviewing court should not reject a reasonable administrative interpretation even if another interpretation may also be reasonable." Call A Nurse, Inc. v. Shalala, 59 F. Supp. 2d 938, 942 (E.D. Mo. 1999) (citing Creighton Omaha Reg'l Health Care Corp. v. Bowen, 822 F.2d 785, 789 (8th Cir. 1987)).
The APA grants federal courts the power to set aside an agency's action that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. Anderson v. Farm Serv. Agency of the United States Dep't of Agric., 534 F.3d 811, 814 (8th Cir. 2008). A decision is arbitrary and capricious if "the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." In re Operation of Missouri River Sys. Litig., 421 F.3d 618, 628 (8th Cir. 2005) (citing Cent. South Dakota Coop. Grazing Dist. v. Sec'y of the United States Dep't of Agric., 266 F.3d 889, 894 (8th Cir. 2001)).
The Court's review is limited to a determination of whether the agency's determination was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. "This narrow review entails a 'searching and careful' de novo review of the administrative record presented to determine 'whether the decision was based on a consideration of relevant factors and whether there has been a clear error of judgment.'" Rosenau v. Farm Serv. Agency, 395 F. Supp. 2d 868, 872 (D.N.D. 2005) (quoting Downer v. United States, 97 F.3d 999, 1002 (8th Cir. 1996)).
Where the terms of a statute are clear and straightforward, judicial inquiry is complete and the legislative history should not be considered. United States v. Vig, 167 F.3d 443, 448 (8th Cir. 1999). It is well-settled that where a statute is ambiguous, the court may look at the statute's legislative history.
The Medicare program,*fn2 Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., was established to provide health insurance to the aged and the disabled. Medicare Part A serves as hospital insurance and covers the costs of hospital, related post-hospital, home health services, and hospice care. 42 U.S.C. § 1395c et seq. Medicare Part B serves as supplementary medical insurance and covers the costs of medical and other health services. 42 U.S.C. § 1395j et seq. The Medicare program is run and administered by the federal government. The Centers for Medicare and Medicaid Services (CMS), formerly known as the Health Care Financing Administration (HCFA), is the federal agency within the Department of Health and Human Services charged with administering the Medicare program. CMS contracts out its payment and audit functions under the Medicare program to third parties known as "fiscal intermediaries." The medical provider submits a cost report at the end of the fiscal year to a fiscal intermediary. The fiscal intermediary audits the cost report and issues a Notice of Program Reimbursement which specifies the amount of reimbursement due to the provider and explains any adjustments. Bethesda Hosp. Ass'n v. Bowen, 485 U.S. 399, 401 (1988). In this case, the fiscal intermediaries that acted on behalf of the Secretary to audit the cost reports of Medcenter One and St. Alexius are Noridian Administrative Services and Blue Cross Blue Shield Association.
A medical provider may appeal the fiscal intermediary's final determination to the Provider Reimbursement Review Board. The Review Board may affirm, modify, or reverse the fiscal intermediary's decision. The Secretary of the Department of Health and Human Services, through the Administrator, may review the Board's determination, either sua sponte or on request of the medical provider. The medical provider may seek judicial review of the Secretary's final determination in a federal district court.
This case involves the issue of whether Medcenter One and St. Alexius are entitled to reimbursement under the Medicare Act for the direct and indirect costs the hospitals incurred in training medical residents at the Family Practice Center during the years 1999, 2000, and 2001. Pursuant to Part A of the Medicare program, a hospital may be reimbursed for the direct (graduate medical education) and indirect (indirect graduate medical education) costs that are incurred in training residents and have been covered and paid for as "inpatient hospital services." See 42 U.S.C. §§1395x(b)(6) (2000) and 1395x(q) (2000); 42 C.F.R. §§ 415.200 (2000) and 415.206 (2000). Graduate medical education (GME) costs include "residents' salaries and fringe benefits (including travel and lodging where applicable) and the portion of the cost of teaching physicians' salaries and fringe benefits attributable to direct graduate medical education." 42 C.F.R. § 413.86(b)(3) (2000); see Univ. of Iowa Hospitals and Clinics v. Shalala, 180 F.3d 943, 947 (8th Cir. 1999) ("Costs associated with graduate medical education include the salaries and benefits paid to interns and residents, the salaries paid to teaching physicians for the time spent supervising interns and residents, and various overhead and indirect costs."). Medicare reimbursement for a teaching hospital's GME cost is based on a hospital-specific rate per resident and the hospital's number of full-time equivalent residents in training. 42 U.S.C. § 1395ww(h) (2000). Indirect graduate medical education (IME) expenses include "'the additional tests and procedures ordered by residents as well as the extra demands placed on other staff as they participate in the educational processes.'" St. Mary's Hosp. of Rochester, Minn. v. Leavitt, 416 F.3d 906, 909 (8th Cir. 2005) (quoting H.R. Rep. No. 98-25(I), at 140 (1983)). Medicare reimbursement for IME costs is calculated from a "formula  derived from a statistical analysis of teaching hospitals' costs compared to non-teaching hospitals' costs that takes into account the ratio of residents and interns to beds . . . ." St. Mary's Hosp. of Rochester, Minn., 416 F.3d at 909.
Medicare reimburses the medical provider for the direct and indirect costs incurred in training residents based on the number of full-time equivalent residents. Historically, for GME and IME purposes, a resident's time was counted towards full-time equivalency for the time spent training in the hospital. In 1986, Congress amended the Medicare regulations to allow a hospital to count all of a resident's training time, regardless of the setting, towards the hospital's full-time equivalent resident count for GME costs. H.R. Rep. No. 99-727, at 70 (1986). In the House Report, Congress stated, "The Committee bill would change the current regulations by providing that all of the time that a resident spends in activities related to patient care is to be counted towards full-time equivalency, without regard to the setting in which those activities take place, so long as the hospital is incurring costs for that resident's training."*fn3 H.R. Rep. No. 99-727, at 70.
In 1997, Congress amended the Medicare reimbursement statute to allow a hospital to count all of a resident's training time, regardless of the setting, towards the hospital's full-time equivalent resident count for IME costs. See 42 U.S.C. § 1395ww(d)(5)(B)(iv) ("Effective for discharges occurring on or after October 1, 1997, all the time spent by an intern or resident in patient care activities under an approved medical residency training program at an entity in a nonhospital setting shall be counted towards the determination of full-time equivalency if the hospital incurs all, or substantially all, of the costs for the training program in that setting."). Accordingly, the Medicare reimbursement statute for the years at issue provided that all of the time a resident spends in training under an approved medical residency training program, regardless of the setting, shall be counted towards the determination of full-time equivalent resident counts so long as (1) the resident is involved in patient care activities and (2) the hospital incurs "all, or substantially all, of the costs for the training program" in the non-hospital setting. 42 U.S.C. §§ 1395ww(d)(5)(B) (1999, 2000, and 2001) and 1395ww(h)(4)(E) (1999, 2000, and 2001). In addition to the two statutory requirements for counting a resident's non-hospital training time for GME and IME payments, the Secretary's regulations imposed an additional administrative requirement, namely, that the hospital have a written agreement with the non-hospital site. See 42 C.F.R. § 413.86(f)(4) (2000); see also 42 C.F.R. § 412.105(f)(1)(ii)(C) (2000) (applying the standard set forth under 42 C.F.R. § 413.86(f)(4) with regard to IME costs).
The primary issue before the Court is whether the Administrator's determination that the Plaintiffs had not incurred all or substantially all of the costs for the residency training program at the Family Practice Center during the years 1999, 2000, and 2001 was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. The Plaintiffs contend that the Administrator's decision was arbitrary, capricious, contrary to law, and in excess of statutory authority because: (1) the Administrator applied the Medicare Act retroactively to deny the Plaintiffs' benefits; (2) the Administrator's decision permits an invalid agency action without the observance of legally required procedures; (3) the Administrator's decision is inconsistent with the plain language of the Medicare Act; and (4) the Administrator's decision ignores the substantial evidence and the law demonstrating that the Plaintiffs met the requirements under the Medicare Act. The Secretary contends that his interpretation of the applicable statutes and regulations is reasonable and entitled to deference.
B. STATUTORY AND REGULATORY REQUIREMENTS
As previously stated, the statutory and regulatory provisions which govern GME payments to a hospital for the time that a resident spends in residency training are 42 U.S.C. § 1395ww(h)(4)(E) (2000) and 42 C.F.R. § 413.86(f)(4) (2000). The statutory and regulatory provisions which govern IME payments to a hospital for the time that a resident spends in a training program are 42 U.S.C. § 1395ww(d)(5)(B) (2000) and 42 C.F.R. § 412.105(f)(1)(ii)(C) (2000).
42 U.S.C. § 1395ww(h)(4)(E) reads as follows:
Such rules shall provide that only time spent in activities relating to patient care shall be counted and that all the time so spent by a resident under an approved medical residency training program shall be counted towards the determination of full-time equivalency, without regard to the setting in which the activities are performed, if the hospital incurs all, or substantially all, of the costs for the training program in that setting.
42 U.S.C. § 1395ww(h)(4)(E) (2000) (emphasis added). Congress did not impose any additional or other requirements for hospitals seeking payment for IME costs. Therefore, the statutory requirements for a hospital seeking both GME and IME costs for the time that a resident spends in a training program are found under 42 U.S.C. § 1395ww(h)(4)(E).
In addition to the two statutory requirements under 42 U.S.C. § 1395ww(h)(4)(E), the Secretary imposed an additional requirement, namely, a requirement that the hospital and non-hospital site have entered into a written agreement. 42 C.F.R. § 413.86(f)(4) (2000) (emphasis added) reads as follows:
(f)(4) For portions of cost reporting periods occurring on or after January 1, 1999, the time residents spend in nonprovider settings such as freestanding clinics, nursing homes, and physicians' offices in connection with approved programs may be included in determining the number of [full-time equivalent] residents in the calculation of a hospital's resident count if the following conditions are met:
(i) The resident spends his or her time in patient care activities.
(ii) The written agreement between the hospital and the nonhospital site must indicate that the hospital will incur the cost of the resident's salary and fringe benefits while the resident is training in the nonhospital site and the hospital is providing reasonable compensation to the nonhospital site for supervisory teaching activities. The agreement must indicate the compensation the hospital is providing to the nonhospital site for supervisory teaching activities.
(iii) The hospital must incur all or substantially all of the costs for the training program in the nonhospital setting in accordance with the definition in paragraph (b) of this section.
42 C.F.R. § 412.105(f)(1)(ii)(C) incorporates the same requirements described in 42 C.F.R. § 413.86(f)(4) for reimbursing hospitals for IME costs.*fn4 The statutes do not define "all or substantially all." The regulations define "all or substantially all" as "the residents' salaries and fringe benefits (including travel and lodging where applicable) and the portion of the cost of teaching physicians' salaries and fringe benefits attributable to direct graduate medical education." 42 C.F.R. § 413.86(b)(3) (2000). Neither the statutes nor the regulations define the term "program."
1) PATIENT CARE ACTIVITIES
Both the statutes and the regulations require that the residents claimed by the Plaintiffs for the years 1999, 2000, and 2001 spent their time in patient care activities. The parties do not dispute that the residents claimed by the Plaintiffs as full-time equivalent residents for the years 1999, 2000, and 2001 spent their time ...